Is Lehman Brothers Skating On Thin Ice?
For several months, rumors have been percolating that Lehman Brothers Holdings could be teetering on the verge of becoming the next Bear Stearns. Speculation over troubles at the nation’s fourth-largest investment bank reached a near-boiling point in early July when rumors leaked that some of Lehman’s biggest trading partners had plans to scale back their business with Lehman. Both of the firms in question - Pacific Investment Management Co. and SAC Capital Advisors LLC - denied the claims and issued statements to that effect.
Nonetheless, Lehman, like every other Wall Street firm, is vulnerable. Rumors, after all, played a major role in bringing on the near collapse of Bear Stearns in March - a situation that ultimately created an unprecedented move by the Federal Reserve to facilitate an 11th hour sale of the 85-year-old company to JPMorgan Chase.
In Lehman’s case, however, there certainly seems to be some uncanny similarities to Bear Stearns in the works.
Concerns about Lehman’s liquidity and leverage came to light in June, after the Wall Street bank reported a larger-than-expected $3 billion loss in its second quarter from exposure to subprime mortgages and other credit derivatives. On July 11, Lehman’s already battered shares plummeted to a 10-year low, falling as much as 21% as unfounded rumors circulated that some of its trading partners were cutting back their dealings with Lehman. Year-to-date, Lehman’s shares are down 73%.
Following the dismal second-quarter loss, Lehman announced key leadership changes within the company, demoting Erin Callan - one of the highest profile female executives on Wall Street - from the position of chief financial officer and Joseph Gregory from the chief operations officer post.
Adding to Lehman’s credibility problems was news that spreads on its credit-default swaps had widened as much as 40 basis points on July 10, a sign that traders were requiring higher returns on insurance against the possibility of bankruptcy.
More fuel to the rumor fire for Lehman turned up courtesy of comments from Federal Reserve Chairman Ben Bernanke and Treasury Secretary Henry Paulson, both of whom testified before the House Financial Services Committee that the government’s proposed overhaul of regulators will help increase oversight but doesn’t guarantee financial institutions are too big to fail.
Whether or not Lehman Brothers is indeed headed down a path reminiscent of Bear Stearns remains to be seen. But as was witnessed in the case of Bear Stearns, when the lines between perception and reality become increasingly blurred, anything can and will happen.
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